On April 22, 2009, four months after he took office, President
Barack Obama proclaimed that green technologies
would be the linchpin of economic advancement.
“We can hand over the jobs of the 21st century to our
competitors,” he said at a wind energy manufacturing plant in Newton,
Iowa, “or we can confront what countries in Europe and Asia
have already recognized as both a challenge and an opportunity:
The nation that leads the world in creating new energy sources will
be the nation that leads the 21st-century global economy.”

Private sector investors in the United States have been similarly
enthusiastic, investing a total of $8.9 billion in clean energy
companies in 2009.1 This is a sizable sum, but it does not guarantee
that green technologies will provide a sufficient return on
investment. Both the public and private sectors spent billions of
dollars developing the market for corn-based ethanol over the past
20 years before a consensus emerged that ethanol would not solve
the economic and environmental problems it targeted.

A similar story may be playing out in the solar cell industry, as
evidenced by Massachusetts’s experience with Evergreen Solar. In 2007, the state invested millions of dollars to entice Evergreen to
build a new plant near Boston. The plant did create 800 manufacturing
jobs, but the excitement over the deal eventually soured.
As solar cell prices plummeted from late 2008 onward, Evergreen
faced mounting losses and saw its stock price crater from $15 to 80
cents. Then in January 2011, Evergreen announced it would close
its factory and shift production to a joint venture with a Chinese
company in central China—this after $43 million in assistance
from the government of Massachusetts.2

Massachusetts’s experience should serve as a cautionary tale
about investing in green energy. If governments pour large subsidies
into green technologies, they run the risk of backing technologies
that, like ethanol, are fundamentally flawed. Solar power is a
similarly flawed technology if it is deployed in competition with
the existing power grid.

We believe there is a better way to evaluate, invest in, and deploy
green energy technology. Our research examines the drivers of successful
innovation and illustrates how these drivers can yield a set
of predictable rules that govern the success of new technologies.
We also have developed a set of factors that predict the failure of
a new technology. Green energy technologies, just like those that
drive personal computers, mobile phones, and software, must follow
the rules of innovation and avoid its pitfalls.

For our purposes, green energy technologies are those that
either harness power from renewable, sustainable sources or seek to reduce adverse human impact on the environment. Many
of these technologies also hold the potential to contribute to energy
independence. We include such technologies as solar, wind,
and geothermal power, biofuels, and smart power grids, as well as
hydrogen and electric vehicle propulsion. In order for these new
sources of energy to have the widest possible implementation, investors,
technologists, and policymakers must understand not just
their potential impact but also their commercial viability. Many
technologies can be successful if they are deployed according to
sound innovation theory.

The first reason is obvious: The technological
approach itself proves to be unworkable or unscalable. The plasmodium
parasites that cause malaria, for example, evolve so quickly they
have defied eradication by conventional immunological techniques.
And similarly, the potential for generating energy from controlled
nuclear fusion is still far away, because technological problems repeatedly
defy techniques to initiate and control this reaction.

Most green energy technologies face some kind of significant technological
hurdle. Solar cell technology has undoubtedly advanced, but
it still faces technological hurdles to improving efficiency. Similarly,
battery technology, which is critical for electric vehicles, is coming
up against natural chemical boundaries. Fuel cells, elements of the
smart grid, and wind turbines all run into technological problems.

Systemic Complexity

A second reason promising technologies
fail is that they are rarely “plug compatible” with existing value
chains. Hydrogen-powered fuel cells promise a means of powering
vehicles with no emissions except a trickle of water out the tail
pipe. But fuel cells face an extremely long and challenging road to
commercial acceptance, as they suffer from extraordinary systemic
complexity. The ubiquity of the gasoline filling station is one reason
that fuel cells will have a difficult time achieving widespread adoption.
The infrastructure required to refuel a hydrogen-powered car
does not exist and would require the coordinated investment of
billions of dollars. Existing gasoline station equipment cannot be
adapted to store and dispense hydrogen. This entire stock of equipment
would need to be replaced. Hydrogen-powered cars can catch
on only if hydrogen filling stations are liberally sprinkled across our
roadways. Unfortunately, such stations will not exist unless there are a lot of hydrogen-powered cars as well. It is a classic technological
chicken-and-egg problem that can be overcome only through expensive
government mandates and subsidies that would alter the fuel
distribution infrastructure in a coordinated way. With such a large
and thriving gasoline ecosystem in place, we are more likely to see
adoption in technologies that either work with the existing system
or bypass it entirely. Gas-electric and plug-in hybrid vehicles are examples
of technologies that improve fuel efficiency while working
within the constraints of the existing infrastructure.

The refueling station problem is a well-known barrier to hydrogen
adoption, but the systemic problems associated with hydrogen production
may be even more troubling. Hydrogen does not naturally exist
on the earth in the form required for fuel cells. Ironically, the most
common form of producing it is to separate hydrogen molecules from
natural gas, which produces harmful carbon emissions. The other option
to produce pure hydrogen is through electrolysis, which breaks
down water into its constituent hydrogen and oxygen molecules. The
problem with this method is that even if large-scale electrolyzers were
technologically practical, such machines would require large quantities
of electricity. With renewable electricity generation still limited, the
only cost-effective way to power an electrolyzer would be from fossil
fuels, again defeating the purpose of hydrogen-powered vehicles.

Without sufficient capacity of renewable electricity generation,
hydrogen-powered vehicles will not solve any environmental problems.
For fuel cells to make sense, the entire system of electricity
generation must be substantially modified. And perhaps even more
daunting: Should this feat be accomplished, every subsequent step in
the value chain would require a wholesale redesign of its existing
infrastructure. We are quite certain hydrogen fuel cells will find
limited success in displacing gasoline-powered engines.

Head-On Competition

The third cause of the commercial failure
of advanced technologies is head-on competition with established
technologies. When a technology is forced into direct competition
against an established foe, it will be adopted only if it is more cost-and
performance-effective than the established technology in the
markets where it is being used. This creates enormous barriers
against commercial success. New technologies have much better
success rates when they are aimed initially at nonconsumers—those
who are not consuming the existing products or services because
of lack of wealth, expertise, or access. These nonconsumers often
embrace products with limited functionality or quality, because they
are superior to the alternative: no product at all.

Consider the path that the transistor took in overthrowing the
vacuum tube. Throughout the early 1950s, most electronics products
were made with vacuum tubes—devices the size of a child’s
fist that consumed a lot of power. The mass of these devices meant
that the televisions and radios from which they were built had to be
large. Radios were placed on tabletops and televisions stood on the
floor. All of the vacuum tube companies—the giants of consumer
electronics, such as RCA, Zenith, General Electric (GE), and Westinghouse—
saw the potential of the transistor and spent hundreds
of millions (in today’s dollars) trying to make the transistors good
enough for the markets where vacuum tubes were used.

Meanwhile, some inventors saw the potential for transistors to
create new markets altogether. The first commercial application for transistors was the germanium transistor hearing aid in 1951—an application
where vacuum tubes weren’t feasible. Then in 1955 Sony introduced
its first pocket radio, a simple, inexpensive, low-performance
product. But Sony marketed its radio to teenagers, customers who
were delighted to have a limited product because it was better than
the alternative: no radio at all. While the vacuum tube companies
continued to work on the technology, Sony introduced the world’s first
portable transistor television in 1959. Again, it was a limited product.
But by making a TV so much more affordable, a new population of
customers whose apartments or wallets were not big enough to afford
an RCA television now could have one. Again, because the simple
Sony product was better than nothing, customers were delighted.
New markets emerged as Sony wielded simplicity and affordability
to compete against nonconsumption. By the late 1960s, solid-state
technology had become good enough that Sony and Panasonic
could begin building large televisions and radios. Within about
five years, customers had switched over to solid-state electronics,
and every one of the vacuum tube businesses vaporized.

Solar and wind power generation are green technologies that, at
least in the developed world, are being deployed in competition with
the existing electrical grid. As noted, whenever new technologies compete
head-on with established systems, challenges loom due to the
cost and performance gaps between the new technology and the old.
Solar and wind power are no different. Both are more expensive than
the existing grid, and both have performance deficiencies related to
weather conditions. Even with significant government subsidies to
encourage adoption, the percentage of total electricity derived from
wind and solar in the United States remains tiny, illustrating the barriers
these technologies face to displacing the existing grid.

Customers Don’t Want It

The fourth reason promising technologies
fail commercially is that, although they provide technically
sophisticated functionality, they do not help customers do a job
they need to have done. By job, we mean a fundamental problem a
customer needs to solve, including a specific result or outcome. If a
technology helps users accomplish a job they are already trying to
do in a superior way, it is far more likely to succeed. If a technology
tries to solve a job with which a customer isn’t terribly concerned,
it is likely to face headwinds.

The rise of digital photography offers an illustration of how consumers
will change their behavior in response to new technology, but
not the fundamental job they are trying to do. When prints were the
only way to view photos, people had the best of intentions to arrange
photos in albums, but the vast majority of prints were viewed once,
then placed in a shoebox. Despite this tendency, most people would
ask for double prints so they could mail the best photos to a family
member, not knowing beforehand which prints would turn out well.
Once digital cameras were fully adopted, consumers changed their
behavior, but not the fundamental job they wanted to perform with
photos. Now, the killer app for photos is e-mail. Despite all the systems
for online photo albums, the dominant consumer behavior is
to attach photos to an e-mail for sharing. The technologies for online
photo albums were always going to be challenged as they tried to
perform a job that most consumers weren’t trying to do. The challenge
is not in changing consumer behavior, but in changing the job
that consumers are trying to accomplish.

Although we believe the smart grid will be an important incremental
innovation, certain aspects of it run afoul of the jobs-to-be-done
concept. The term “smart grid” encompasses a set of technologies
that allow both electricity producers and consumers to make better
decisions about power use through real-time data. Portions of the
smart grid system are necessary, evolutionary improvements to the
existing power grid. For example, advanced smart meters benefit
power companies by eliminating the need for manual meter reading,
automating the billing process, and providing real-time detection of
outages.3 We believe smart grid technologies that lower cost or improve
performance will be readily adopted by power companies.

But smart grid enthusiasts may be disappointed as they find that
the behavioral change from consumers is not as strong as they had
anticipated. A subset of smart grid technologies are intended to provide
electricity users with price signals to help people manage their
power consumption more efficiently. These technologies envision a
home in which a consumer, seeing the high cost of electricity from
2 p.m. to 4 p.m. in the summer, will turn down his air conditioning,
turn off lights, and lower the temperature in the fridge. The potential
savings from this technology could be substantial—as much as
30 percent of a typical consumer’s power bill.

Although smart grid technology makes it possible for consumers to
achieve such savings, it does not ensure that consumers will change
their behavior. Just as we saw in the photography example, consumers
will change their behavior only if the technology helps them accomplish
a job they were already trying to do. For frugal consumers
who already monitor their power consumption to reduce their power
bills, real-time price signals will be welcomed as a way to manage
their bill more efficiently. Unfortunately, not all consumers fall into
this category. Those who are not looking for a system to help manage
electricity usage will probably have little interest in smart grid technologies.
They will not change their behavior, because the technology
does not help them do a job they already were trying to do.

Are green energy technologies doomed to failure for the reasons
we’ve outlined? We don’t think so. What follows are recommendations on how to develop and deploy green energy technology to maximize
its chances for success in the developing and the developed world.

GREEN ENERGY IN THE DEVELOPING WORLD

Solar energy is both less reliable and more expensive than traditional
power generation, despite its desirable environmental
impact. Given its limitations, would-be commercializers of
solar energy should ask themselves: Where are there customers who
would value a technology that generates unreliable electricity? The
answer: the rural villages of India, Mongolia, Indonesia, Tanzania, and
other developing nations. These are the locations where solar energy
can be successfully commercialized, because solar will be competing
against nonconsumption of energy rather than a reliable, inexpensive
power grid. Just as Sony’s transistor radio gained acceptance among
nonconsumers, green technologies will find enthusiastic reception
in the unconnected villages of the developing world.

Commercializing green technology in the developing world has
the added benefit of contributing to the fight against carbon emissions.
Currently, nearly half of carbon dioxide emissions are from
developing nations. According to the U.S. Department of Energy, by
2030 developing nations will produce nearly double the carbon dioxide
emissions of developed countries if their energy sources develop
along the same lines. So green technology can enable both greater
energy consumption and a cleaner path to economic development.

Although competition with nonconsumption will greatly aid its
commercial success, green technology faces unique challenges in
the developing world. First, technologies succeed best when the
business unit responsible for developing and deploying the technology
is also located where its targeted customers are. That way, the
business unit will have the cost structure and managerial incentives
that make pursuing “good enough” products at lower price points
an attractive proposition.4 For example, when the management of
GE’s medical imaging business was largely located in the developed
world, it focused on producing the most advanced and highest margin
CT and MRI scanners possible. Once GE created an autonomous
business unit in China, it was able to develop a low-cost ultrasound
machine that had great benefits in rural China. Furthermore, as GE
continued to develop these products, it began to find applications
for them in the developed world, opening up large markets for its
innovative products.

The second requirement for succeeding in the developing world
is to sell a product that provides a full solution for a customer need.
In the developing world, it may not be enough to sell solar panels.
Such a product may be of little use to a village with no electrical
infrastructure or appliances. Rather, it is important for companies
to deploy a technology that is tied to an application. D.light design,
which is based in India but was founded in Silicon Valley, illustrates
the importance of understanding customers’ circumstances. Rather
than just offer a lamp in a place with unreliable energy or offer a raw
solar cell, D.light bundles its lamps with solar panels fit for consumers’
energy requirements, which are small—often around 0.5 watts. Their
products are far better than commonly used kerosene alternatives,
because they are significantly safer, are more durable, and provide
far better light. D.light design has distributed 1.7 million lamps to rural Africa and India; it continues to develop its business.

The third requirement for the developing world is that companies
may need to integrate their activities across a wider spectrum of the
value chain. In many of these countries, a well-functioning sales and
distribution infrastructure with wholesalers and retailers does not
exist. As a result, companies that usually rely on partners to sell and
distribute their product may find a similar strategy impossible in
the developing world. In these regions, companies may need to take
on sales and aftermarket servicing to develop their markets. One
successful approach is the creation of a network of rural entrepreneurs
who sell a company’s products to friends and family. D.light
design has developed such a system to increase its reach.

GREEN ENERGY IN THE DEVELOPED WORLD

Green energy adoption faces more daunting challenges in
the developed world. With a convenient, low-cost, and
pervasive energy infrastructure in place, green technologies
must prove themselves more affordable or better performing to
displace their competitors. By and large, the only way green energy
has been able to meet that standard is through government subsidies
that bridge the gap between actual cost and grid parity. Although a
small segment of consumers actively seek renewable energy sources
out of concern for the environment, the battle to win the hearts and
minds of hundreds of millions of developed world consumers will
not be won quickly enough to solve our energy and environmental
problems. We believe that there are some spaces in which green energy
technologies can succeed and thrive in the developed world,
but they must comply with the rules of innovation.

One of the green technologies that can find a market is the electric
vehicle (EV). The EV contains certain limitations that will prevent it
from winning in head-on competition with traditional vehicles. Remember,
to win in head-on competition, a technology must be either
less expensive or better performing, and the electric vehicle is neither.
Despite undeniable progress, no manufacturer has succeeded in
bringing the cost of EVs below that of traditional sedans. And even
if EVs reach cost parity with gas vehicles, their performance limitations
remain. Battery technology caps an EV’s range at 100 miles
between recharges. Because a full recharge takes eight to 12 hours,
EVs cannot be used for long trips, which make up an important part
of the job-to-be-done for which consumers buy a car.5 Furthermore,
most EVs accelerate slowly and have maximum speeds well below
the 80 mph that consumers typically demand.

We believe there is a set of customers who would actively seek
out a car with both limited range and acceleration. The parents of
American teenagers have precisely the job-to-be-done for which an
electric vehicle would be a perfect match. These parents want to
allow their teenagers to transport themselves to and from school,
work, and friends’ homes, but nowhere else. They would actually
prefer a car that does not accelerate quickly or drive on freeways. To
complete their appeal to this market segment, EVs need to be priced
cheaply so that affluent families could plunk down cash to buy one.
Again, this is good news for EV manufacturers, as they can offer a
bare-bones version of their vehicles and not worry about their performance
relative to standard sedans. Compounding the good news for manufacturers is the fact that by getting a product on the market,
they will incrementally improve their EVs, slowly closing the performance
gap with gas-powered vehicles. In this way, a low-priced EV
could disrupt the predominance of the gas-powered vehicle, just as
Sony’s transistor radios disrupted vacuum tube radios.

Although a real market for low-cost electric vehicles exists, it is
unlikely that EVs will achieve substantial market share for some time.
Disruption often unfolds at a glacial pace, especially in an industry
like autos with high capital costs and long design-to-production
cycles. For that reason, the primary mode of competition in the
auto industry will continue to be a sustaining one. By sustaining
competition, we mean that competitors will continue to try to best
each other within the framework of well-established technologies,
incrementally improving performance or reducing costs.

In industries where sustaining competition dominates, hybrid
technologies are likely to be adopted. This is because hybrid technology
enables exactly those incremental performance or cost advantages
that allow companies to win a head-on competition while
remaining within existing systems of use. In the automotive industry,
we have already seen hybrid vehicles, such as Toyota’s Prius, make
significant inroads as fuel efficiency becomes an increasingly important
basis of sustaining competition. Such vehicles do not suffer
from any of the problems of systemic complexity that hydrogen- or
battery-powered vehicles face. They operate wholly within the existing
automotive infrastructure, not requiring the infrastructure to
bend to its needs. Hybrid vehicles also may compete very effectively
in a head-on manner by being more convenient, if not eventually
lower cost. Although current hybrid technology cannot yet win in
head-on competition with gasoline vehicles, hybrids are far more
likely to be adopted in head-on competition than are pure-play
electric vehicles. We are particularly optimistic about the coming
generation of plug-in hybrids, which will propel cars up to 40 miles
on electricity before requiring the gasoline engine to kick in. This
solution provides the vast majority of everyday driving needs on
electricity alone, while preserving the flexibility to take longer trips.
Early models will not be cost competitive, but as the technology improves
and scale advantages arise, cost competitiveness may well
be achieved, especially if gasoline prices continue to rise.

CONSERVATION IN THE DEVELOPED WORLD

So long as green technologies follow the rules of successful
innovation, they will be adopted readily in the developed
world. The problem is that the developed world’s existing
energy infrastructure is so cheap and convenient that it creates
large barriers to adopting new energy technologies. And with few
nonconsumers of energy, they offer hardly any space in which green
technologies can take hold organically. This is why governments in
developed countries must play a large role in formulating and enforcing
conservation mechanisms to reduce energy use.

The recent move by some governments to phase out the incandescent
lightbulb is a good example of the kind of conservation measures
that are required. The incandescent lightbulb traces its history back
to Thomas Edison. These bulbs produce light by heating a filament
until it glows inside a glass bulb. Although the technology has served the developed world well for more than a century, it is terribly inefficient
in its use of energy. Up to 90 percent of all the energy used in
a lightbulb is wasted as heat, with the bulb producing only 15 lumens
per watt. By contrast, a compact fluorescent lightbulb (CFL) produces
50 to 100 lumens per watt, and the energy savings more than make
up for a CFL’s increased cost ($3 per bulb vs. 50 cents per bulb for
incandescents). If a consumer were to spend $90 on 30 CFLs for her
house, total energy savings could range from $440 to $1,500 for the
five-year life of the bulbs.6 The United States has now mandated that
the incandescent lightbulb be phased out of the U.S. market in 2012.
Experts have estimated that if everyone in the country switches to
CFLs, it will eliminate the need for 30 coal-fired power plants, and
will save an amount of electricity equivalent to that used by all the
homes in Texas each year.7

Government-mandated conservation efforts succeed best when
they align with the interests of entrenched stakeholders. In the case
of the lightbulb, manufacturers find the mandate attractive as CFLs
represent a higher priced, higher profit margin product than incandescent
bulbs. Consumers also stand to benefit from the energy savings
reaped from CFLs. By contrast, California’s attempt to establish
quotas for electric vehicles in the early 1990s was challenged from the
beginning. As the quotas applied only to California and EV technology
was so expensive at the time, it would have been very difficult for
automakers to earn a profit on vehicles produced in such low quantities.
This ran counter to their natural interest to produce higher
volume, higher margin vehicles. The resulting industry opposition
eventually caused California to retreat from its proposal. We don’t
argue that government should cater to powerful interests, only that
it should be prepared for a much more difficult path if conservation
mandates create large burdens for industry.

It is undeniable that the world needs cleaner and more sustainable
sources of energy, and green energy technologies can contribute
to that effort. Yet our research into innovation and technology
commercialization cautions us that the development and success
of these technologies must conform to well-established rules. It
would be a mistake for governments to pour large sums of money
into technologies that will have difficulty finding commercial acceptance.
But that is precisely the path many governments appear
to be following. A better way to develop and deploy green energy
technologies is to incubate them in places where they can succeed
commercially from the outset.

Clayton M. Christensen is the Robert and Jane Cizik Professor of Business Administration at Harvard Business School. He is best known for his book The Innovator’s Dilemma: The Revolutionary Book that Will Change the Way You Do Business,a study of disruptive technologies and their impact on business.

Suman (“Shuman”) Talukdar is a business development executive for Silicon Valley startups and a graduate of Harvard Business School (email: st at talukdar.co).

Richard Alton is a senior researcher at the Forum for Growth and Innovation at Harvard Business School.

Michael B. Horn is the co-founder and executive director of education of Innosight Institute, as well as the co-author with Clayton Christensen of Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns.

COMMENTS

In this country, ethanol has been and still is a give-away to Big Ag. It was first peddled as a solution to foreign oil dependency. No one not on a payroll believes that petroleum-dependent (ironic!) corn- or other-based ethanol is green. Not a good example.

It is premature to make a judgment on smart grids and consumer behavior since the consumer side - use of smart appliances, energy managers, PC and smart phone user interfaces, etc. - is only just beginning to enter the marketplace. Most consumer experience so far is the revelation of more accurate and expensive billing by utilities - their use of the new information not consumers’ use. This one-sided state of affairs is hardly the path to consumer acceptance and behaviorial change and a shaky foundation on which to build conclusions.

Conversations about the price of green energy versus traditional power are often incomplete. The costs of traditional power generation are not fully accounted for in the price of the power. To compare green power to the market costs of traditional power tells an incomplete story.

A new study by Dr. Paul Epstein, the Director of Harvard Medical School Center for Health and the Global Environment and eleven co-authors, to be published in the Annals of the New York Academy of Sciences, “Full Cost Accounting for the Life Cycle of Coal,” estimates that “the life cycle effects of coal and the waste stream generated are costing the U.S. public a third to over one-half of a trillion dollars annually.”

The US$3.00 per bulb cost of CFLs is a bit dated. Any comparison that uses such a high cost will fail to reflect the realities of the market of 2011 and overlook even higher total energy savings for consumers.

“Government-mandated conservation efforts succeed best when they align with the interests of entrenched stakeholders.”

Government-mandated conservation efforts are usually only possible when they align with the interests of some group of entrenched stakeholders. Such effort do not appear solely out of good intentions but are shaped by lobbying and political donations of interests groups, stakeholders with financial interests in a future with certain legislation and regulation.

You write that “With a convenient, low-cost, and pervasive energy infrastructure in place, green technologies must prove themselves more affordable or better performing to displace their competitors. By and large, the only way green energy has been able to meet that standard is through government subsidies that bridge the gap between actual cost and grid parity” but you fail to mention the subsidies that oil and gas companies receive from the government as well. The price of oil/gas is not accurate because it fails to internalize costs such as pollution, damage to our environment, health costs etc. If we priced oil and gas accurately, green energy would be better able to compete. How about a carbon tax?

Working in China for the past 13 years in a high growth region like Guangdong Province allowed me opportunities to occasionally work for local oil companies and attend some of their conferences as a spectator in the early 2000s.

It is clear to me that your reference to the competition from established energy industries has not only blocked innovation in green tech, it has aggressively pursued a “buy-out and sideline” strategy for emerging alternative energy markets. It was discussed openly at the oil conventions. Now there is an overwhelming realization among the so-called conventional energy companies that the limits on resources and reserves - especially as China develops into a Leviathan of energy consumption - mean a kind of doom if something is not done.

The opponents to alternative energy are taking up the reins and trying to drive the wagon but they do not have a clue about the social ecology of their pursuits. State smart power grid is on the move here in China and in the USA, and there is no stopping it.